Those falling mortgage rates don’t mean falling home prices, Capital Economics says, revising its forecast up for the year

Mortgage rates are falling, and they’re considerably lower than a recent peak reached in October at about 8%. But even now, with the average 30-year fixed mortgage rate at 6.69%, it’s not nearly enough to restore affordability, let alone push home prices down.

In a research note published Friday, Capital Economics’ property economist, Thomas Ryan, wrote that the firm doubts the modest fall in mortgage rates will bring “a great deal more stock onto the market.” That matters because the supply of homes, particularly existing homes, is already tight, and that has generally kept home prices up. Because it doesn’t see substantial increase in supply ahead, Ryan’s firm revised its home price prediction—and revised it upward.

The firm now expects home prices to increase 5% on an annual basis this year—quite a jump from its prior forecast of a 1.5% year-over-year increase. Ryan said himself that the firm’s revised house price forecast is “well above the consensus.”

To compare, Morgan Stanley forecasts a 3% drop in nationwide home prices this year; Redfin predicts home prices will fall 1% year over year in the second and third quarters of 2024; and Zillow expects home prices will fall 0.2% by the year's close. Either way, the upward revision comes down to supply and demand. The latter, Ryan wrote, will improve.

“Last year, strong house price increases came despite extremely high mortgage rates, as the sharp drop in supply outweighed weak demand,” he wrote. “This year, demand is likely to rise as affordability improves.”

Capital Economics anticipates the median mortgage payment as a share of the median income to fall from 27.5% (a peak reached last year) to 24.5% by the end of 2024. That’s not to say affordability will greatly improve, but it’ll bring some would-be buyers back to the market. Supply, on the other hand, is a different story.

The hope was that once mortgage rates dropped, the lock-in effect, in which existing homeowners refuse to sell for fear of losing their low mortgage rates, would ease. The research firm expects mortgage rates to fall to 6.25% by the end of this year. That’s in line with its prediction that inflation, as measured by the personal consumption expenditures price index, will fall to the Federal Reserve’s 2% target by the middle of this year, pushing the Fed to cut interest rates, at which point the 10-year Treasury yield will drop.

While that all sounds good, the Capital Economics suggests the lock-in effect will still have an impact on housing supply because the drop in mortgage rates isn’t enough to “close the gap between the interest rate on new loans and all outstanding mortgages.” That being said, it expects listings to remain low and inventory to remain tight this year. That tight supply coupled with increased demand will push house prices up, according to firm's outlook.

Still, there’s already been a slight improvement in existing home sales—after falling to their lowest level in more than a decade and five monthly consecutive declines, they rose in November to a seasonally adjusted annual rate of 3.82 million. But they’re down more than 7% year over year. By the end of this year, Capital Economics expects existing home sales to increase to 4.3 million, a downward revision of its prior forecast of 4.6 million.

As for new home sales, which “held up well last year” because of the lack of for-sale existing homes and homebuilders’ ability to offer incentives, the firm expects them to reach 798,000 by the end of this year. As of November, new home sales were running at a seasonally adjusted annual rate of 590,000. Capital Economics’ view on single-family homes starts is also optimistic—although even if its prediction is correct, single-family home starts will still be below that of the construction boom from 2020 to 2022, the note said.

This story was originally featured on Fortune.com